News Item

The Reserve Bank Agenda for the next three years

Industry Advice 2 Jul 2021

Reserve Bank has just announced its agenda for next 3 years including promising a “holistic” approach to the bank’s work including progressing initiatives such as South Pacific remittances as key to its purpose and vision. The Pacific Cooperation Foundation asked the Reserve Bank some questions regarding the Reserve Bank’s view of the Pacific banking sector. Read the Q and A below.

What is the Reserve Bank Governor Adrian Orr referring to exactly when he says, “Now is the time for New Zealand banks to act with courage to keep banking services, including money remittances, to the Pacific Islands open”?

Correspondent banking relationships (CBRs) are vital to the economic prosperity of Pacific nations. These relationships between banks in different countries facilitate domestic and cross-border payments and currency exchange, they enable trade, foreign investment, and remittances- Pacific people being able to send money back to their home countries.

Australian and New Zealand banks are important providers of correspondent banking relationships and broader financial services in the region.

However, the number of correspondent banking relationships in the Pacific region are in decline. Globally, rising risk management and compliance costs, including anti-money laundering and countering financing of terrorism (AML/CFT) requirements and economic sanctions, and issues around profitability are contributing to a worldwide contraction in the correspondent banking network. In the Pacific, these global factors are exacerbated by challenging commercial conditions and under-development of regulatory compliance capabilities.

As a result, some Australian and New Zealand banks are choosing to reduce or withdraw their services to some parts the region. In some cases, banks have removed nearly all correspondent banking services, in others, some foreign currency accounts, (such as US dollars or Euros), have been removed as a part of rationalisation while retaining NZD and AUD foreign currency accounts.

The Reserve Bank recognises the importance of international banking links with the Pacific and intends to keep talking to commercial banks to understand their concerns and if possible help maintain confidence in existing links.

The Reserve Bank has undertaken preliminary research on the topic and a more-detailed analytical note will shortly be published on the topic.

In 2019, we established the Pacific Remittance Project (PRP) with support from the Ministry of Foreign Affairs and Trade (MFAT) to address challenges facing remittance services domestically and in the Pacific region. The project aims to make it easier and cheaper to send money around the Pacific through remittances. The PRP is working with banks and remittance service providers in the Pacific region to help the remittance sector enhance its compliance with regulatory and legal obligations. This includes developing a regional ‘Know Your Customer’ (KYC) facility to more effectively identify customers and risk, exploring potential policy, legislative and regulatory changes to help stem de-risking, and providing coordination and subject matter expertise around digital identity verification and payment systems. In parallel, we continue to work with both domestic stakeholders and regional and international agencies to develop pan- regional guidance.

Do think regulation might be a more effective tool to get banks to behave differently, or is that the wrong tool, and instead, do you think the New Zealand Govt should provide financial incentives/subsidies to NZ Banks to assist in being more courageous?

No central bank has the power to force commercial banks to maintain international banking systems- they are ultimately commercial decisions for banks to make.

However, the regulatory environment is one factor that contributes to the cost of maintaining these relationships. We want to ensure that regulatory settings in New Zealand appropriately reflect the risk-reward trade-offs present in our region. To this end, we have consistently conveyed our expectation that banks take a risk-based approach to AML/CFT compliance. Blanket de-risking, the trend of financial institutions deciding to simply avoid rather than manage risks associated with customers or class of customer, is not consistent with a risk-based approach.

The Reserve Bank said. “We cannot comment on broader NZ Government policy in regards to the Pacific. For further comment please contact Treasury or MFAT.

What do you see as the greatest risk to the Pacific Islands if New Zealand Banks do not heed the advice of the Reserve Bank Governor?

In the worst case scenario, withdrawal of correspondent banking relationships could undermine the functioning of the financial system, weaken growth prospects, and reduce resilience to shocks. Other more likely scenarios are Pacific banks having to forge new correspondent banking relationships with second tier, less reliable and more expensive providers (see below).

Other potential consequences include continuing high costs of remittance, less money reaching South Pacific Island families and communities, less access to financial services, less opportunity for financial inclusion, reduced ability to detect and deter crime, reduced compliance with international standards and a missed opportunity to align with other regional digital initiatives.

And what do you see as alternative options for the Pacific Islands if the NZ Banks do not heed the advice of the Reserve Bank Governor?

The Pacific is at the forefront of this global trend, therefore we have few international examples to look towards. Often when other jurisdictions have seen acute loses in CBRs, it has been associated with additional financial or political disruption, and therefore the consequences may not be applicable in our context.

However we do know that CBRs are essential for the movement of payments through the Pacific, Losing them could damage Pacific economies by reducing trade/ making transactions more expensive.

To enable these important payments to continue, Pacific banks would have to find alternative ways to stay connected to the global financial system The Reserve Bank is concerned that less reliable, less visible (from a regulatory perspective) and more expensive trade and money transfer services would fill the gap if banks dropped out.

This could be costly – for example there are reports elsewhere in the world where the cost of money transfers have risen significantly due to withdrawal of CBRs with a disproportionate impact on small value payments.

Photo: Jonathan Milne/Cook Islands News